PPA Valuation: What is Fair Value?
When acquiring a business, one of the most important steps is determining how its purchase price is allocated among the company’s assets and liabilities. The best way to do so is to obtain a purchase price allocation (PPA) valuation. As part of a PPA valuation, business appraisers determine the fair value of each asset or liability the company owns. Having this information is vital for financial reporting and compliance. In addition, knowing the fair value of a business’s assets and liabilities enables strategic decision-making to maximize the company’s value.
In this article, we explore the PPA valuation process and highlight the true meaning of ‘fair value’. For more information on purchase price allocation valuations, check out What is a Purchase Price Allocation Valuation?
As a professional business appraiser, Peak Business Valuation conducts purchase price allocations on a regular basis. We are happy to help you with a PPA valuation and answer any questions you have on purchase price allocation and fair value. Start now by scheduling a free consultation with Peak Business Valuation below!
Understanding Purchase Price Allocation Valuations
A Purchase Price Allocation (PPA) valuation involves distributing the total purchase price among the company’s tangible assets, intangible assets, and liabilities. The main purpose of a PPA valuation is to ensure compliance with accounting standards like GAAP and IFRS. Calculating the value of assets provides transparency in financial reporting. Additionally, PPA valuations help stakeholders understand the financial implications of a business transaction. Read Understanding a Purchase Price Allocation Valuation for more guidance.
What is Fair Value?
Fair value is the price someone would pay for an asset or the amount someone would accept to take on a liability on the open market. It shows the true economic worth of something based on current market conditions. Determining fair value is vital for accurately allocating the purchase price of a business among its assets. At Peak Business Valuation, we use proven methods to calculate fair value and provide you with trustworthy insights for your business.
Methods for Calculating Fair Value in a PPA Valuation
When performing a PPA business valuation, business appraisers at Peak use the market approach, the income approach, or the asset approach. Each method uses a different basis of valuation. In many cases, we use a combination of these methods for the most accurate results. Below, we discuss the details of each valuation approach. If you have any questions, reach out to Peak Business Valuation today!
The Market Approach
First, the market approach is a widely used method for determining fair value in a PPA valuation. This method measures the value of a business’s assets by comparing them to similar assets that were recently sold. By analyzing this data, valuation experts establish a benchmark to conduct the PPA valuation. This method also includes using valuation multiples. These are financial ratios that measure the value of assets based on metrics like cash flow, earnings, or sales. See The Market Approach Made Simple for additional information.
As a business appraiser, Peak Business Valuation works with thousands of businesses throughout the United States. We can help you with a purchase price allocation valuation and answer any inquiries on fair value. Get started by scheduling a free consultation with Peak Business Valuation below!
The Income Approach
Next, the income approach focuses on the future earning potential of an asset. This method is especially useful when valuing intangible assets like intellectual property or customer relationships. When using the income approach, an appraiser projects the asset’s expected cash flows over a three to five-year period. Then, they apply a discount rate to estimate their present value. Peak Business Valuation carefully analyzes financial forecasts to provide an accurate fair value assessment when utilizing the income approach. For more details, see The Income Approach Made Simple.
The Asset Approach
Last, the asset approach calculates fair value by calculating the net worth of a business’s assets and liabilities. As such, this approach is useful for asset-heavy companies like construction or manufacturing businesses. First, the valuation analyst values each asset, and then subtracts the company’s liabilities. This provides a thorough understanding of the value of a business’s resources. To learn more, see The Asset Approach Made Simple.
Using The PPA Valuation Report
At the end of a purchase price allocation valuation, you will receive a PPA valuation report. This document details the fair value of each asset and liability. Additionally, it discusses the methodologies used, an explanation of the purchase price allocation, and insights into the company’s financial health. You can use this information as a roadmap to increase the value of a business. Check out Reviewing a Purchase Price Allocation (PPA) Report for more information. Peak Business Valuation is here to help you, reach out if you have any questions!
Conclusion
PPA valuations are crucial for accurate financial reporting and compliance. When performing a PPA business valuation, business appraisers determine how a company’s purchase price is distributed among its assets and liabilities. To do so, they calculate the fair value of these components using the market, income, and asset approaches. An accurate purchase price allocation valuation promotes transparent and accurate financial reporting and strategic decision-making. If you are seeking a PPA business valuation, it is important to work with a professional and experienced business appraiser.
Peak Business Valuation is a professional appraiser that specializes in PPA business valuations. As such, we are available to provide you with a purchase price allocation valuation whether you are buying, growing, or selling a business. Peak can also address any questions on business valuations and fair value. Start now by scheduling your free consultation with Peak Business Valuation below!
